So are we headed for a housing market crash? It’s a fair question, so what’s the answer? Housing economists agree that no painful crash is on the horizon.
“We don’t have a bubble,” says Logan Mohtashami, lead analyst at HousingWire. “We just have unhealthy home price growth.” The sharp rise in home values, isn’t a sign of a crash or a bubble. Housing economists point to six compelling reasons that no crash is imminent in the market.
- Inventories are at record lows: The National Association of Realtors says there was just a 2.1-month supply of homes for sale, up marginally from February’s 2.0-month supply. That explains why buyers have little choice but to bid up prices. And it also indicates that the supply-and-demand equation simply won’t allow a price crash in the near future.
- Secondly, Builders can’t build quickly enough to meet demand: Homebuilders pulled way back after the last crash, and they never fully ramped up to pre-2007 levels. Now, there’s no way for them to buy land and win regulatory approvals quickly enough to quench buyer demand in this market. While builders are building as much as they can, a repeat of the overbuilding of 15 years ago looks unlikely. The reason for the run-up in price is heightened demand and a lack of supply. As builders bring more available homes to market, more homeowners decide to sell and prospective buyers get priced out of the market, supply and demand can come back into balance. But balance will not happen overnight.
- Mortgage rates remain near historic lows: After hitting all-time lows in January, mortgage rates have risen a bit — but not much. Freddie Mac’s survey of lenders says the average rate fell below 3 percent last week. Low rates give home shoppers increased buying power. The Mortgage Bankers Association expects rates to rise to 3.7 percent by the end of 2021. That would crimp refinancing, but not homebuying.
- Demographic trends are creating new buyers: There’s strong demand for homes on many fronts. Many Americans who already owned homes decided during the pandemic that they needed bigger places. Millennials are a huge group and in their prime buying years. And Hispanics are a young, growing demographic keen on homeownership.
- Lending standards remain strict: In 2007, “liar loans,” when borrowers didn’t need to document income, were common. Lenders offered mortgages to just about anyone, regardless of credit history or down payment size. Today, lenders impose tough standards on borrowers — and those who are getting mortgages overwhelmingly have stellar credit. The typical credit score for mortgage borrowers in the third and fourth quarters stood at a record high 786, the Federal Reserve Bank of New York says. “If lending standards loosen and we go back to the wild, wild west days of 2004-2006, then that is a whole different animal,” McBride says. “If we start to see prices being bid up by the artificial buying power of loose lending standards, that’s when we worry about a crash.”
- Foreclosure activity is muted: In the years after the housing crash, millions of foreclosures flooded the housing market, depressing prices. That’s not the case now. Most homeowners have a comfortable equity cushion in their homes. Lenders haven’t been filing default notices during the pandemic, pushing foreclosures to record lows in 2020.
Speaking of foreclosures, while there has been a moratorium on foreclosures, there’s still foreclosures on vacant and abandoned properties. There’s also been a higher level of commercial property foreclosures. FHA loans are the most likely to be foreclosed. While homeowners have asked for forbearance, more time not making payments has eroded their home equity. The forecasts for foreclosures in the next five years is 1.3 million, in the worst period from 2008-2012, there were 4.8 million foreclosures.
In 2020 only 23% of pre-foreclosure sales were short sales, which means they owed more than the house was worth which could account for the eroding equity due to non payment. So the forecast is that there is such a demand for housing that the real estate values will increase slightly in the next 18 months and stay flat in 2023. This means the real estate market will not crash.